All Forum Posts by: Tony Kohnle

Hi William, there are some good Realtors and other locals that will be along soon that should be able to get you started. Feel free to contact me if you want my advice. Just be patient right now, we took in a troubled teen and life is a bit hectic at the moment.

Excellent post @Phillip McDonald,

I'm out of the Fee world and haven't done a FNMA form for 10 years so I don't have their guidelines stored and google only gave me the single family version. also, I was to lazy to look closely at about midnight on a Friday night. 

Hopefully your info will help the poster get his deal done....and the appraiser to be a little bit more professional about his work.

I hope this helps you:

"Only finished above-grade areas can be used in calculating and reporting of above-grade room count and square footage for the gross living area. Fannie Mae considers a level to be below-grade if any portion of it is below-grade, regardless of the quality of its finish or the window area of any room. Therefore, a walk-out basement with finished rooms would not be included in the above-grade room count. Rooms that are not included in the above-grade room count may add substantially to the value of a property, particularly when the quality of the finish is high. For that reason, the appraiser should report the basement or other partially below-grade areas separately and make appropriate adjustments for them on the Basement & Finished Rooms Below-Grade line in the Sales Comparison Approach adjustment grid."

From here - https://selling-guide.fanniema...

its the single family guide but I could not find the multi family guide on line.

I skimmed USPAP (the appraisers 350+ page rule book) but didn't find anything specific to basement units. Generally however it says you are to conform the clients guidelines unless they conflict with USPAP.

Im glad i read the thread all the way through before posting. The appraiser may have done you wrong or may have saved you some big bucks. More info is needed.

Appraisals can not consider below ground space unless there is adequate egress in case of a fire or other emergency. This includes direct walkout door(s) and height and size  requirements on windows. Local codes rule on whether it is legally habitable, but lenders also face issues in selling these loans in the secondary market because of liability/risk issues and poor understanding of the rules there as well. Sometimes they just use the appraisal to made a perceived "risky" property go away.

Having said that, the appraiser can not just ignore the finishes either. He/She needs to address them as finished space below grade and describe them and their impact on value. Something like " the below grade area has its own entrance and is finished as a third unit with four rooms and is reportedly rented as a separate unit" it is beyond the scope of this analysis to determine if this is a legally permissible separate unit however county assessment records do not mention it, so I have assumed that it is not legal and given no contributory value" or with the ending " If found to be legal, the space would contribute $xx,xxx to the subjects market value." 

Then it is up to you/seller/bank/title company or other party to verify if the unit is in fact legal. Tax records are handy but they are really just another appraisal. if the assessor never got the permits for the conversion, they just have no idea its there. their records have nothing to do with the legality of it. 

I usually see this on the big development projects and was kind of taken aback because it was a relatively small commercial deal of a couple hundred thousand. 

The 1031 exchange makes sense if it’s just a throw on property to make the numbers balance better. Given the individual is a big time Broker, and the property is in a long time depressed market that is starting to get some redevelopment traction, it is probably them using it as a way to facilitate a bigger deal, and maybe hit a home run with it if the area does take off.

I thought it was worth asking here because I’m sure somebody has done it, or it will give some future reader an extra tool to think about using in their deal making toolbox.

@Heather Schmidtknecht

Hah, I had one of those in the first house I bought. I’ll always remember standing on or near the vents after coming in from the cold, and feeling the actual gravity fed hot air. It’s much nicer than the lukewarm air from a forced air furnace or a heat pump. I held off a couple years in replacing it because I had other priorities and the operating cost wasn’t that much higher in a moderate sized home.

Everybody else has covered the cost and remediation issues, so I’ll also just note how much extra space you will have in the basement after it’s gone.

I saw a deed and mortgage where ownership was split 50/50 between a (new) LLC and an individual. Is their any particular advantage to this? Or was it just individual preference of the partners?

My first thought was it might be for the individual to get easier financing but both names were on the mortgage from a commercial bank. I then thought it might ease a buyout, but isn't it easier to change an LLC's ownership than have redo the title and mortgage. I have never seen it before and it's got me scratch my head.

Glad I could help @Shawn Long,
Sorry, I don’t have any references in that area.

In general, just being a CPA means they are experts who have an extensive education and have passed rigorous testing. There are specialties however, so I would just ask about their experience with Real Estate investors of the type you are working with, and maybe typical client base questions, so you can recommend people who focus on that, instead of, say fine art collectors, or restaurant owners. 

Beyond that, it’s really up to the investor and accountant to talk. Some investors will want a very aggressive accountant that will push every boundary to maximize savings, while others prefer a more conservative accountant who advises safe, consistent strategies that minimize the stress of potential audits or attention.
Other than in very broad terms,They really can’t say what strategies they would recommend for a potential client until they know that clients whole financial picture.

@Adam Tahir

I would do what others have said.

Don’t tell how much you have. Everyone will want a piece.

Start small and scale up. Every time you go through the process you will learn. From the Agents, Bankers, Appraisers, and just seeing the numbers. Ask questions and keep your eyes and ears open.

This will also expose you to potential partners and resources, that can mentor and train you.

Find people you trust. Lots of people with the knowledge you want would love to partner with you because they can leverage your money into more. Many will just be out for themselves, but many will also be glad to teach you what they know, so you also get an education along with a cash return on your investment.

Be wise on choosing those partnerships and you will be blessed with good investments and good knowledge, choose poorly and you will just get an education.....

@Shawn Long

As a non Accountant let me rephrase some of what has been written here.

With the IRS it’s pretty much you can pay me now, or pay me later.

A good CPA can help people use strategies that minimize the overall impact of those taxes by controlling the timing. You can’t always mix and match those strategies, they really need to be tailored to an individuals personal needs and situations.

Depreciation. The IRS basically considers an investor owning a house the same as a landscaper owning a backhoe. It’s a piece of equipment they need to run their business. Equipment depreciates, or is worth less over time, so you claim a paper loss of a percentage of the cost of the property each year you own it until it’s fully depreciated. This paper loss can offset actual cash income the property generated in that year, so you don’t pay income tax on it. Nice right?

Well, when you go to sell the house. If it’s worth nothing, you are golden and don’t owe any taxes. If it’s like most houses and is actually worth something, and probably more than you paid for it, then the IRS is going to want back the taxes that were deferred, a penalty for having to wait, and a tax on the properties increased value.

That big chunk can be deferred even longer by using a1031 exchange to reinvest the money back into another property, essentially keeping the money in the business instead of putting it in your pocket. You can do that until you die, and then let your heirs pay the taxes.

Buying a property in a Roth IRA is a great tax avoidance system because it's set up as a retirement fund. You pay taxes on your normal income then put it in the IRA and any income or value increase is completely tax free.... you just can't spend it till you retire.

There are other examples, but as you can see, these are long term individualized plans, and the best plan will be different for each investor.